Hong Kong-listed GCL-Poly Energy Holdings has raised $200 million from a privately negotiated sale of convertible bonds, according to an announcement over the weekend.
The deal came after the market was awash with rumours last week that the company, which makes polysilicon and wafers for solar cells and also operates environmentally-friendly power plants, was looking to issue a CB in the public market. The share price gained 8.9% on the back of such speculation to finish the week at HK$2.58, which was on par with the 21-month high that it reached in mid-October.
But rather than offer CBs to the wider market, GCL-Poly chose to do a deal with just one buyer – a fund run by investment firm PAG (formerly known as the Pacific Alliance Group). However, it may sell a further $28.2 million worth of CBs to China Investment Corp (CIC), China’s sovereign wealth fund, if the latter chooses to exercise its anti-dilution right to maintain its current shareholding intact.
CIC bought a 20% stake in GCL-Poly in 2009 but sold part of that through a $287 million block trade in June this year and currently holds just under 12.4%. It is still the second largest shareholder after chairman Zhu Gongshan, who owns 32.4% together with his associates.
If CIC decides not to buy any CBs then PAG has the option to take up these bonds as well within 30 days. Either way, it seems likely that GCL-Poly will raise a total of $228.2 million from this transaction.
A second surprise was that the deal was arranged by Bank of America Merrill Lynch, since the rumours last week were that JP Morgan and Standard Chartered were working on a CB for the company and were sounding out potential terms with certain investors.
However, according to sources, BofA Merrill has been pushing a private deal to the company for some time while the other two banks were working on a public market transaction only. GCL-Poly did not comment directly on why it chose to do a private market deal in its announcement, but observers said that a sizeable investment by a high-quality and high-profile investor such as PAG should help boost confidence in the stock among other long-term investors as well.
GCL-Poly is popular with hedge funds since it is pretty liquid – the average daily turnover is about $40 million – but long-only investors have been less convinced amid the ups and downs of the solar power industry over the past few years.
Also, the sell-off in the secondary market for Hong Kong CBs last week – some names fell as much as five points – may have made it more difficult to obtain the terms the issuer was seeking in the public markets.
Judging by the 3.5% gain in the share price on Monday following the announcement of the deal, the market did welcome the transaction and several CB bankers away from the deal said that based on the publicly available information, GCL-Poly appears to have got “a pretty good deal.” The overall market was also up strongly, however, and the Hang Seng Index closed 2.7% higher.
Despite being a private deal, the CB has a structure that is very similar to a public market transaction with a five-year maturity and a three-year investor put option and the intention is to list the bonds in Singapore. There is no issuer call, however, and the bonds cannot be converted for the first six months.
They pay an annual coupon of 0.75% and a yield-to-put/maturity of 2.5%. The conversion price has been set at HK$3.125, which translates into a conversion premium of 21.6% versus GCL-Poly’s close last Friday. The initial conversion price will be adjusted in full for dividend payments.
If they are fully converted into equity, PAG will end up holding a 3.1% stake in the company. Including the additional $28.2 million worth of bonds that may be bought either by CIC or PAG, the CBs account for 3.5% of the enlarged share capital.
PAG will borrow up to 260 million GCL-Poly shares from a company controlled by the chairman at an unspecified fee, according to the announcement. It does not say why but the arrangement suggests that PAG intends to short the stock to hedge the equity option on the CB. The shares it may borrow account for 52% of the number of shares that would be issued if the $200 million CB was to be converted into equity in full.
The stock lending will be done on “normal commercial terms”.
GCL-Poly said that it will use the money raised for capital expenditure and general corporate purposes and added that it views a CB to be an appropriate means to raise funds for its ongoing capital investment and general working capital. The deal will also strengthen the group’s cash position.
The company made a HK$3.5 billion ($452 million) loss last year, but in its annual report in mid-March the chairman noted a number of positives, including a rapid increase of the use of solar power energy in emerging solar markets, and further indications that the Chinese government is determined to expand the use of solar power and to increase the domestic demand.
However, it still made a loss of HK$917.3 million in the six months to June, which compared to a loss of HK$330.2 million a year earlier, while revenues fell by 4% to HK$11.3 billion. The chairman attributed this to the fact that the consolidation of the industry has not been fully completed yet and that imported polysilicon was dumped into the Chinese domestic market at a price below cost. “Our business performance was materially impacted by the disorder in the polysilicon manufacturing sector,” he said.
In late July, China started to levy an import deposit of up to 57% for solar grade polysilicon products from the US and South Korea, however, which should result in a recovery of the market price of polysilicon products.
This has helped to support GCL-Poly’s share price, which as of the end of last week had risen 84% from its 2013 low of HK$1.40 that it hit in April.
At the end of October, the company said it has entered into a memorandum of understanding to pay HK$1.8 billion ($232 million) for a 29% stake in Hong Kong-listed Same Time Holdings, a small-cap company involved in the manufacturing and sale of printed circuit boards.
In the announcement GCL-Poly said it intends to use Same Time as a separate listing platform that will focus on the renewable energy sector and in particular, solar plants, solar projects and solar energy assets. While it did not say so directly, this suggests that it plans to inject its existing power plants into Same Time, resulting in a backdoor listing of these assets.
GCL-Poly currently owns, or has investments in, 26 power plants with a combined installed capacity of approximately 1.5 gigawatt, including 19 cogeneration power plants, two incineration power plants, one wind power plant, three solar farms and one roof-top solar project.
It will buy at least 80 million shares in Same Time at a price of HK$4 apiece, plus five-year zero coupon convertible bonds to make up the difference between the price of the shares and the total HK$1.8 billion acquisition cost. The 29% stake refers only to the shares.
